Unprecedented VIX-Stock Swings Driven by Surge in Day Traders' Options Activity
Stock volatility decreases as stock prices increase, which is pretty much what you would learn in any finance course. But recently, the relationship has been breaking down, and the sleuths are working to figure out why.
Day traders have come under scrutiny as a potential suspects in the case, as noted by Citadel Securities, due to their active participation in equity options during the mid-month period when both the S&P 500 and the Cboe Volatility Index showed unusually synchronized movements. It seems that the significant surge in options trading had a substantial impact on the volatility gauge, also known as the $CBOE Volatility S&P 500 Index(.VIX.US$, as this metric relies on these contracts to assess the projected price fluctuations for the $S&P 500 Index(.SPX.US$ .
Retail activity in options volume surged remarkably during the week ending on June 16, reaching levels not seen since November 2021, with a significant preference for bullish calls over bearish puts, according to data provided by Citidal. According to Layla Royer, senior equity derivatives salesperson at the firm, it is no mere coincidence that during two separate sessions that week, the S&P 500 experienced a 1% increase while the VIX, defying historical norms, also saw a rise.
Only twice in the last ten years have synchronized advances of that size occurred in the same week: in November 2017 and March 2020. The trend was again momentarily seen on Friday morning as the $NASDAQ 100 Index(.NDX.US$ once more surged alongside its volatility index.
Vol Up + Spot Up in equity markets is intensifying," Royer wrote in a note to clients. "Retail's increased options volumes/call activity could be a contributor."
Royer at Citadel Securities observed that the market's "spot up, vol up" dynamic has gathered steam since 2020, a year when small-fry traders started flocking to stock trading as a Covid pastime, emboldened by zero brokerage commissions and stimulus checks.
The current similar combination of Spot Up/Vol Up + increased retail activity could point to additional volatility," she said.
Source: Bloomberg
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